How selectors cope with summer holidays and investment teams
Summertime poses other challenges to fund investors, from heightened volatility, lowered liquidity, and questions of who is in charge when the lead manager goes on holiday. InvestmentEurope reports.
As one old adage in the UK suggests, investors should “sell in May and go away, and come back on St Leger’s Day”.
The St Leger Stakes refers to a horse race run each September, and which has been going since 1776. The implication has been that investors should stay away from stock markets during the summer months – as the aristocrats and bankers used to stay away from the City of London in days gone by.
Tilney, the UK investment and financial planning group that oversees some £23bn of assets published research in 2017 that looked at 31 years of total return data for the FTSE All Share index, including dividends reinvested, since the so-called Big Bang reforms that brought in electronic trading to London, among other developments.
This suggested that investors would have made positive returns in 20/31 years by staying invested over the summer. That 65% rate was compared to markets rising 77% of the time across the full calendar years over the period.
Key sell-offs occurred in the summer months of 1992 (-11.6%), 1998 (-12.6%), 2001 (-18.4%), 2002 (-21.2%), 2008 (-13.0%), 2011
(-10.9%) and 2015 (-9.6%), Tilney’s research suggested. But there were also years when double digit gains were made over the summer, such as in 1987, 1989, 1995, 2003, 2005 and 2009.
Meanwhile in April this year, research published by Bloomberg for the 1 May to 15 September period each year from 1988 to 2017, suggested that the adage didn’t necessarily hold true for US assets.
While the MSCI Asia Pacific index achieved a negative return of -1.2% on average, the Stoxx600 did -1%, and the FTSE 100 did -0.4%, for the S&P 500 the return was a positive 1.2%, while US Treasuries did 2.8%, and US high yield bonds did 2%. Gold did 0.6% on average, the Bloomberg numbers suggest.
Going into more detail on such trends, a study on Seasonality in the Baltic Stock Markets, authored in 2015 by Rasa Norvaisienea, Jurgita Stankevicieneb and Ausrine Lakstutienec at the Kaunas University of Technology, logged daily return indices of the Nasdaq OMX Tallinn, Nasdaq OMX Riga, and Nasdaq OMX Vilnius for the period of 2003-2014.
They concluded that regression analysis could only prove an effect in the Estonian stock market – where returns were “significantly higher November- April than that in May-October”.
“The results of regression analysis in Lithuania and Latvia were not statistically significant, so this analysis has not proven the existence of the Halloween effect in Lithuanian and Latvian markets. Disclosed calendar effects in the Baltic countries prove the inefficiency of stock markets in those countries, because stock prices are not random but can be predicted in accordance with calendar moments.
“A return on stock is consistently higher or lower depending on the season. The disclosed seasonal effects may serve as valuable
information to reason investment decisions, as well as to estimate expected returns for market participants who invest in the Baltic markets. Investors could increase their expected profitability and earn more than the average by evaluating the seasonality trends and choosing time of transactions.”
Overall, then, there are numbers that suggest investors should actually pay heed to the patterns that occur in markets over the summer months. However, the causes of such patterns may be varied, and this in turn may mean fund buyers have to take different measures to either tap into upside risk, or avoid downside risk.
Evidence of these other factors comes via the DDQs (due diligence questionnaires) that buyers put to sellers. Rob Sanders is a co-founder of Door, and former global head of Marketing at Aberdeen Asset Management. Door provides a platform intended to facilitate standardisation of the due diligence process, to save fund selectors and fund managers alike significant amounts of time currently allocated to chasing successful conclusions to DDQs.
In this process, the importance of understanding people to the investment process is key to successfully completing the due diligence.
“Investment is a people business, therefore Door’s Standard Questionnaire includes multiple and varied questions related to investment personnel,” Sanders says.
“Questions that relate to a portfolio manager’s time away from the office are covered on two levels, the expected and the unexpected. The questionnaire asks: ‘What decision process is used in the individual’s absence?’ and what is the ‘protocol in the event of an unexpected departure of the portfolio manager?’ The answers to such questions tell us a lot about the continuity of decision-making at the investment firm under scrutiny.
“We cannot rest on our laurels however. The questionnaire evolves continuously with input from Door’s Guidance Panels and from the wider fund selection community as a whole.
“Door’s current collaboration with key industry stakeholders on additional questions that relate to diversity and inclusion has prompted potential questions about a manager’s preparation for staff who are absent on maternity or paternity leave. The addition of D&I questions will add a further and vital dimension to the DDQ process.”
Jake Moeller, head of Lipper UK & Ireland Research at Thomson Reuters, says: “I would contend that technology is now so portable and working conditions so increasingly flexible that any nominated fund manager is likely to have their eyes on their fund at all times – even on a holiday.
“I’ve been a fund manager and the urge to constantly research and monitor your fund is overwhelming – almost paternal/ maternal. ‘B-teams’ are probably more of a compliance construct than a reality. A reputable fund house would have a protocol in place to ensure that where any material change in a stock arose, the lead fund manager would be contactable to relay an appropriate course of action.”
Mussie Kidane, global head of Fund Selection at Pictet Wealth Management responds from the buy side that “during summer, it is business as usual for us”.
“Sure, there are fewer roadshows and fund manager visits, so our research work is more refocused on documentation read-through and record updates.”
“We ask what the back-up plan is when the lead portfolio managers are away, what’s the scope of responsibility of the back-up manager, etc.”
However, as to whether there is a seasonal effect he is less sure: “I don’t know if there is a ‘summer effect’ when it comes to alpha but the slower market activity and shallow liquidity tend to magnify market movements during this period.”
And as to the European Central Bank’s tapering decision: “I think that the ECB has passably forewarned market participants about its intentions. Besides, it’s well understood that the first rate hike has been pushed out to 2019. Barring unwarrantable comments from officials, I don’t think the ECB’s continued tapering will provoke significant turmoil this summer.”
Thierry Crovetto, CEO-CIO of TC Stratégie Financière says a team approach by a manager can help. “Funds with multiple minds stay active during summer time as the team can manage the holiday schedule. A tight team of two fund managers, who challenge or complete each other, will make sure that one of them is present and active during summer time. And finally, we believe that ‘Star Managers’ would always be connected in order to monitor the market and manage the positions as they are passionate about their job and unwilling to disconnect.”
As for himself, Crovetto notes that his own firm “constantly” monitors its own portfolios, whether before leaving for the weekend or going on holidays, in order to adjust the portfolio in case of a correction or rally.
Also, Crovetto is yet to be persuaded about any advantages that, say, ETFs might enjoy over active fund managers during the slower summer period.
“We haven’t found any evidence of outperformance of ETFs during summer at this time,” he says, adding that not being active in summer will “make it harder” to achieve alpha.
Matthias Reiner, head of Portfolio Strategy Multi Asset (D/CH) Bernecker & Cie Portfolio und Trust AG ,suggests that there may be a phenomenon of seasonal summer breaks and portfolio managers’ respective market returns, but he feels it is more myth than reality.
“The reasons, why this topic ‘portfolio managers and summer breaks’ seems rather uncritical to me, are twofold,” he says.
“First, because capital (= stock and bond) markets from year to year become increasingly informative – and time-efficient – which is already the result of the steadily growing share of hedge fund-like and other high frequency traders amongst all investors. Certainly, portfolio management meanwhile is a ‘full year job around the clock’.
“This means that just for the reason of market time-efficiency nowadays an (ambitious) single portfolio manager simply hasn’t any more chance to leave his portfolio management out of his sight and mind during summer holidays, because he immediately would risk falling behind the concurrent performances of his peer competitors or even team members of his own company.
“Second, the only significant pattern on stock and bond markets during the summer season I acknowledge to be true is that because of the holiday absence of many investors overall market turnovers really tend to be lower than in the remaining seasons of the year.”
“But this said, in my opinion this effect of only a general lower market turnover doesn’t allow any conclusions about the resulting market chart technicals and how any kind of relevant information will be reflected in stock / bond prices at the summer season.”
Reiner adds that generally he does not expect deviation from past performance paths just because of the summer season and possible holiday absence of the responsible manager.
“I certainly don’t ask such a question within a due diligence test only for reasons of summer holidays, but for the overall year the question of the target managers’ general substitution process in case of any of his absences is clearly a very relevant one.”
Likewise, the lack of evidence of a significant performance impact just because of the season means that considerations of alternative investments is instead linked to expectations of severe market corrections, which could happen at any time of the year, he says.
The due diligence angle mentioned by Reiner is also taken up by Antoine Chapelle, senior portfolio manager at CBT Gestion, who says that: “During due diligence, we ask how the management team works. We prefer when there is a team management with at least two people who can manage the fund like one chief manager and one co-manager. If there is just one portfolio manager, it is more important to understand the process, and it won’t be a problem if it’s a quantitative process or a long term holding process.”
Patrick Wittek, consultant, Fonds Laden stresses the need to understand the team structure, both internally and externally. “We are team players. Firstly, all decisions will be discussed within the team, before we implement portfolio transactions. During my absence, my colleague maintains the skills of our company and comes into action on the asset allocation, if necessary.
“If fund managers are keypersons in companies or some tactical short-term positions are in portfolios, it is important for us to know, who is assuming responsibility during the portfolio managers‘ holidays.”
That said, Wittek notes that generally speaking the managed portfolios he helps oversee are structured for mid- and long-term periods with low turnover, which may also impact the way that the summer question is approached.
“We expect from good fund managers and their teams, to get alpha in all market periods, not depending of season. We like it, if fund managers see opportunities in times with slower activity – such as in the summer month – and achieve alpha.”
Bernard Aybran, deputy CEO and CIO Multimanagement at Invesco says while it may be true to state that there is less activity in volume terms over the summer, that does not mean there is no volatility, hence “there is no time to rest”.
“Strong movement flows for minor reasons remain quite frequent at some point in July and August. We observe an important differentiation between portfolios and indices. But there is nothing really specific to summer.”
The need to not switch off is echoed by Stephan Germann, chief investment officer of Plurigestion. “I do not reallocate assets or review positions before leaving on holidays,” he says.
“Personally, I cannot stay away from my portfolios during my holiday break. I know what I want to invest in if there is any market correction occurring while I am off. Everything is ready. For instance, regarding tech, I will buy more Chinese names, more semiconductors.
“If there is a sell-off on the emerging debt segment, I already know to which extent I want to increase my exposure. I could screen markets once every day during a 15-day break to understand what is going on in my current trades. I can still call my brokers and make the trade. Because an investment-focused mindset knows no pause. Keeping an eye on investments is alright but trading every day during your break is not. Also, sometimes fresh investment ideas come to mind during holidays.”
There are also strategic reasons to keep looped into investment developments over the summer months, as explained by John Townsend, Investment Fund Portfolio Construction and Optimisation, Matz-Townsend Finanzplanung – who usually limits his own breaks to a week, and avoids holidays at month, quarter and year ends.
“In 2008, my wife and I tried to take a two-week break, but the financial crisis became so obviously intense that we broke it off and headed back to the office to speak and write to all our clients, explain what was happening and to hold their hands. The net result was that we lost no clients and by writing about and reporting the world as we saw it we actually gained clients who had been left feeling unsupported, especially by their banks.”
As to the challenge of portfolio managers going on holiday, he says it does not really apply because of the selection criteria used; he makes sure that there is a big enough team to provide support to a portfolio.
“Vacations are not the only worry here; if a fund manager should fall under a bus or be ill or absent for any reason, there has to be someone capable of continuing with the strategy. If not, then I regard a team that is too small as a knockout criteria in the selection process.
“My portfolios are constructed looking three to five years ahead and any temporary movement may be bad for the nerves, but should not be seen as needing instant action. If I think any particular position needs to be changed then action should be taken irrespective of any upcoming holiday. To procrastinate and to leave changes to the last minute is unhelpful. Once again, the discipline of a three to five year time horizon plays a role in the calm handling of stable portfolios.”
Contingency plans also feature in the questions that Juan Hernando, head of Fund Selection, Morabanc, puts to managers.
“Maybe we do not specifically ask about holidays, but we try to make sure that there are back-ups, not only in the case of the manager but as well in risk management, trading or operations. We try to determine the idiosyncratic risk linked to the manager and depending on that we are more or less demanding regarding back-ups.
“There are some funds highly dependent on a key manager, in these cases we are more interested on what happens in his/her absences. There was a manager that even had a written contingent plan in case he died. In funds that are not so dependent on a manager it is not so relevant but there is always someone in charge.
“We prepare the portfolios depending on potential scenarios. We always have managers working in the office even during bank holidays, so the summer or winter holidays do not change substantially the way we manage portfolios.”
Hernando adds: “We do not make specific operations before holidays to close some trade or some investment. What we do is prepare the portfolios according to our market view. If the market hanges we can adapt.”
Still, certain summer events have left their scars, he acknowledges. “I remember the summer of 2011 that was very painful for the markets. The Eurostoxx 50 plummeted -22.32% from 22 July to 10 August, the S&P 500 -16.71% in that period. It is one of those weeks that the investors do not forge.
“August is usually a lower volume month, especially in Europe, but in 2011 August was the highest volume – one that shows how complicated it was. During the following year the problems in the eurozone continued and the summer was very volatile until Draghi pronounced his ‘whatever it takes’. 2011 and 2012 are an usual conversation topic before summer holidays.”
This feature was first published in the July-August 2018 issue of InvestmentEurope.